Another lesson from Lehman

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The Supreme Court considered whether interest payable under rule 14.23 of the Insolvency Rules 2016 is “yearly interest” within the meaning of Section 874 of the Income Tax Act 2007. Finding that it is, the administrators of Lehman Brothers International (Europe) (Lehman) must first deduct income tax before paying statutory interest to creditors.

Lehman entered administration in September 2008.  The administrators have realised sufficient funds to pay unsecured creditors in full and have an estimated surplus of c.£7 billion, of which c.£5 billion is payable as statutory interest.

At first instance, the judge found that the interest payable did not meet the definition of “yearly interest” because it was in a class of its own.  The Court of Appeal overturned the decision.

The administrators appealed to the Supreme Court, which agreed with the Court of Appeal, finding that:

  1. the obligation to deduct tax from interest under Section 874 is not dependent on whether the interest was in the hands of the recipient;
  1. whilst payable on the realisation of a surplus and the administrators' decision to pay it, the administrators lack discretion regarding interest payments;
  1. the statutory interest replaces the creditor’s former contractual rights; and
  1. proving creditors are (involuntary) investors.  It was “no mere irony” that Lehman’s unsecured debt had been a satisfactory long-term investment.

Consequently, statutory interest is subject to income tax.

Joint Administrators of Lehman Brothers International (Europe) (In Administration) v Revenue and Customs Commissioners: [2019] UKSC 12

 

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